Equity Valuation: Models from Leading Investment Banks

25

UBS Economic Growth Quotient

25.1 THE EGQ CALCULATION

The UBS Economic Growth Quotient (EGQ) is a measure of a company's economic profit growth potential. It is calculated as the present value of all the company's projected future economic profits incremental to the current level divided by the present value of the company's current earnings valued in perpetuity. This ratio compares value attributable to the company's future growth to that derived from its business already in place.

In the UBS Value Creation Analysis Model (VCAM), we refer to the present value of all future incremental economic profits as incremental value creation (IVC) and the present value of a company's current after-tax operating earnings valued in perpetuity (NOPAT/WACC) as economic book value (EBV).

If a company has an EGQ of 100%, then half of its estimated intrinsic enterprise value is attributable to its expected economic profit growth, as the present value of its forecasted incremental economic profits would be equivalent to its current earnings valued in perpetuity. An EGQ of 300% would indicate that forecasted economic profit growth is worth three times the value of EBV. EGQ can be either positive or negative, theoretically with no limit.

25.2 EGQ SPECIAL ATTRIBUTES

25.2.1 A complete metric

EGQ is based on and designed to agree with DCF and economic profit analysis. EGQ does this by reflecting the ...